Americans in Israel Targeted by IRS for Tax Audits

Suspected Child Credit Fraud of Hasidim Prompts Scrutiny

By Nathan Guttman

Published March 03, 2014, issue of March 07, 2014.

(page 2 of 3)

As the claims mounted, suspicion grew at the IRS, which eventually set up an “Israel project” for dealing with suspected tax returns from Israel, said Charles Ruchelman, a former government tax lawyer who now represents clients in tax controversies and litigation. “When they identify a trend, they start a project, and that’s what happened here,” he said. Eventually, almost all tax returns from Americans living in Israel that included a request for child tax credit were put under extra scrutiny and many have been audited.

The broad brush used to uncover Israeli fraudsters has had an impact on many American families living in Israel and will continue to do so in the upcoming years, as the IRS looks into 2013 returns.

“I never thought it would happen to me. Last week I received a letter from the IRS stating that I owed tens of thousands of dollars in taxes and penalties,” wrote a Haredi blogger after receiving the IRS envelope containing the audit announcement.

One Jerusalem resident told the Forward that her family spent months gathering the documents needed for the audit, which eventually found no wrongdoing in the family’s tax returns. “They wanted to see every pay stub and every document,” said the mother of four, who asked not to be identified due to concern that it would negatively impact her tax case.

Besides such income data, the IRS has demanded that families in Israel supply birth certificates, passports and detailed listings of their travel in and out of Israel to determine their eligibility for the child tax credit. In addition, the IRS requires Israelis to have all documents translated by a professional translator, a demand that is not imposed on other countries and results in hefty translation bills for those being audited. “These are abusive audits,” argued Adlerstein.

While audits have been ramped up, no criminal charges have been filed against any of the fraudulent tax preparers working in Israel. The difficulty in reaching them could have to do with the reluctance of tax filers to turn in the preparers to the authorities.

An Israeli tax professional shared the story of a client from the ultra-Orthodox community in Bnei Brak who was asked to pay $25,000 in back payments and fines. The family, who spoke little English and was unaware of the details included in its tax returns, refused to provide the IRS with the name of the person who prepared the fraudulent returns, citing Jewish laws that prohibit snitching on fellow Jews to the authorities.

“The IRS has decided not to believe anything coming out of Israel and now it has in place this massive audit program that is creating great hardship for families, especially young families with children,” said Stein.

The IRS did not respond to questions from the Forward regarding its audit policy of tax filers living in Israel.

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